People who own stocks, mutual funds and other capital assets have some extra figuring to do right now as they decide whether to cash in or hang on to those investments.
Thanks to rising bond prices and the stock market's climb to record highs this year, many of them are sitting on some generous paper profits.With the shakeout that hit the markets since early November, the urge naturally arises to pocket some of this money by selling before the gains shrink any further.
But at the same time, the tax consequences of acting before year-end may prove costly if investors don't plan their moves carefully.
"The sale of investments is one area where you have abundant control over the timing of income," says William Brennan, editor of the Ernst & Young Financial Planning Reporter, a bimonthly advisory letter.
"It is generally not advisable to make investment decisions based on tax implications alone. But on the other hand you cannot ignore the effect of taxes on your net investment return."
In most situations, investment advisers recommend that sales at a gain be postponed until December is over in order to keep this year's tax obligation to a minimum.
They also note that holding on could prove to have a bonus benefit if the White House and Congress take action in 1992 - an uncertain but not unthinkable prospect - to give capital gains more favorable tax status.
Numerous proposals of that sort have been discussed in Washington lately as a means of encouraging investment and economic growth.
Long-term gains once enjoyed a preferential treatment that was eliminated by the Tax Reform Act of 1986.
In a change that got less attention, a small amount of that special standing was restored under 1990 legislation that took effect this year.
As a result, long-term capital gains, or profits on investments held more than one year, are now taxed at a maximum rate of 28 percent. The rate on short-term gains and other income can go as high as 31 percent for upper-income tax-payers.
One way to reduce the tax burden on capital gains is to take them in the same year you sell some other investment at a loss.
Losses reduce capital gains dollar for dollar for tax purposes. If a loss exceeds any gains, it can be deducted from ordinary income up to a yearly maximum of $3,000, with the balance carried over to future years.
"Don't forget capital losses on securities can offset capital gains on other investments such as art or real estate," notes Merrill Lynch in a recently published tax planning booklet.
Brennan suggests this approach to the problem: "First, determine whether you have realized a net capital gain or loss on 1991 investment transactions to date. Then consider the unrecognized gain or loss on your existing investments.
"If you are about to sell appreciated investments, you may instead want to defer recognizing the capital gains until next year.
"Or you may want to accelerate losses into this year to help offset net gains."
Merrill Lynch adds another thought that can sometimes be overlooked in an investor's eagerness to get the tax angles just right: "Remember, no matter how heavily it is taxed, a gain is always better than a loss."